Naked political expediency: 2 performance test reviews inside 8 months
If superannuation fund executives are cynical about the Treasurer, Jim Chalmers, initiating further consultation around the superannuation fund performance then it is probably because it is less than eight months since the last consultation.
The common reaction to superannuation fund executives and trustees in the aftermath of the Chalmer’s announcement was that it represented an expedient political exercise which simply reinforced the fact that the performance test methodology started flawed and remains flawed.
Chalmers said on Tuesday that the Government would “consult on options to improve th superannuation performance test so that trustees are held to account for member outcomes without holding back investment in economic priorities such as the net zero transformation or housing.
He said that while the test had helped lift the investment performance of superannuation funds there were “concerns that the current test may be influencing investment decisions to the detriment of member outcomes, including investment in asset classes that can strengthen the economy, such as in housing and net zero transformation, even where it would be in the best financial interests of members”.
It is worth noting that the Treasurer’s statement followed on from calls from industry superannuation funds for regulatory concessions to encourage the type of investments the Government is looking for and barely a week after research confirmed that the performance test was skewing super funds’ asset allocations.
That analysis, conducted by National Australia Bank within its Super Insights Report, confirmed the worst fears of critics of the performance test that it would encourage funds to skew their investments to ensure they passed the test.
The NAB research found that 88% of funds admitted that the performance test influenced how they set their strategic asset allocation and implemented their investment strategy.
It found that when setting their strategic asset allocation , the major of funds looked at absolute investment risk, relative peer performance risk and YFYS risk.
The NAB research found that increased YFYS benchmark sensitivity was driving allocations to asset classes that are readily benchmarked.
This follows on from warnings contained in submission to the Treasury consultation that superannuation funds would “game” the performance test methodology to ensure they gained a pass mark.
The two major accounting bodies – CA ANZ and CPA Australia – specifically referenced the “gaming” of the performance test and said in their submission “we are already seeing evidence of this unfortunate aspect”.
For its part, even Australia’s largest industry fund, AustrlaianSuper, lamented that the existing performance test did not adequately capture the value-add that a fund might generate from asset allocation decisions and that it “rewards a poor investment strategy that is implemented well”.